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Mark Gomes, PTT Research (1,259 clicks)
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Last night, Rainmaker Systems (RMKR) announced third quarter earnings. Most notably, the company delivered on its promise to achieve positive adjusted EBITDA. This marks the sixth consecutive quarter of improvement in adjusted EBITDA, but the first time the company has posted a positive result. On the conference call, CFO Timothy Burns stated:

As we said on both the first and second quarter conference calls, we anticipated returning to adjusted EBITDA positive in the third quarter of the year, and I'm very pleased today to announce that we've achieved that goal and have reported a positive adjusted EBITDA of $100,000 in the third quarter of 2012 compared to a negative $191,000 in the second quarter of 2012.

With that hurdle cleared, the outlook becomes the key item of focus. In that regard, things look even better:

Last quarter, we announced major wins with Comcast and Microsoft. During the third quarter, we invested in launching the Comcast and Microsoft programs as we prepare for the full ramp of these programs in the first quarter. We're pleased to announce we're able to achieve adjusted EBITDA breakeven even with these significant investments.

Comcast (CMCSA) provided negligible revenue in Q3 due to a minor delay, but is expected to grow in Q4 and be hitting on all cylinders during Q1. RMKR will also be generating meaningful revenue from Microsoft (MSFT) by Q1, thus cashing in on investments that have already been made. This has obvious implications for RMKR's earnings growth as we enter 2013.

In addition to the above, RMKR had numerous other successes in the quarter:

  • RMKR is now seeing three new clients for the B2B e-commerce solution Cox Communications, Leads360 and Vendavo. The Cox deal is of particular interest. RMKR has traditionally sold to large software vendors. When it announced the Comcast deal, we wondered if that would mark the first of many major wins in a large new vertical. It appears that we have our answer.
  • The company expects to divest its Manila operations in the fourth quarter. This will immediately increase the company's gross margins while adding cash to the balance sheet. Those operations represented $2.6 million of RMKR's cash burn during the nine months ended September 30, 2012. They are now counted as discontinued operations. This is another positive catalyst for profitability going forward.
  • RMKR also launched a new $2 million two-year agreement for B2B sales with an existing major global software client and was awarded a multi-year expansion with Polycom.
  • The company narrowed the search for a new CEO to four candidates and therefore relieved Michael Silton from the post. CFO Burns will serve as interim CEO in anticipation of the new CEO coming on board. Burns said this will occur before year-end.

With EBITDA profitability and several large multi-year contracts in-hand, RMKR now offers investors two attractive characteristics that weren't as certain before this quarter: 1) its growth and earnings leverage raise its profile as one of our "Poised to Triple" picks. 2) its earnings visibility are such that the stock might become viewed as a safe haven in a treacherous economic/earnings environment.

The combination of low risk and high reward has become difficult to find in this environment. With RMKR's Q3 behind us, all that's left is the official appointment of its new CEO and execution against its recent contract signings. Meanwhile, uncertainty surrounding Q3 contributed to a recent 25% pullback in the shares, providing an opportune entry point for investors.

Source: Rainmaker Delivers Positive Adjusted EBITDA In Q3